This is pretty big news for our industry:
http://online.wsj.com/article/SB120456185094007821.html?mod=hps_us_whats_news
The article linked above indicates that we could see huge changes in the way property appraisals are conducted in the future. Essentially, Fannie Mae & Freddie Mac, who ultimately dictate guidelines for a majority of mortgage financing, are agreeing to change the way in which mortgages are ordered in our industry.
Currently, the loan originator who is compensated when the loan is originated and has no liability for the loan if it performs poorly, is the party who orders the appraisal. Furthermore, typically the appraiser is only compensated when a loan closes. Therefore, the incentive system currently in place leads to pressure on appraisers to come up with value to make deals work. Undoubtedly this has led to fraud and the “stretching” of values in certain instances over the past couple years.
However, the impact of this agreement could mean longer turn times for processing loans as well as higher costs to consumers. The reason? I’m not sure how Fannie and Freddie propose to create a clearing house for appraisers but I have to believe that centralizing such a task and maintaining efficiency will end up being a major challenge.
The timing of this agreement is not surprising. As I’ve mentioned in past posts regulation and rule changes always seem to commence when the “crapt hits the fan”. As banks and investors count their losses for foolish loans made over the past couple years they answer by putting rules in place to restrict these practices in the future.
My answer to all of these problems would be something a little different. I think it would be best for banks and lenders to find a way to tie the loan originators compensation to the long-term performance of the loans they make.